Tax sale properties?

Factual Questions
1

Ok, so I was bored enough to watch about 5 minutes of an informercial today. I was going to pull the old, "my friend told me . . . " but screw it. I was eating breakfast and I didn’t feel like reaching for the remote so I watched.

It was some guy named John Beck hawking a set of books that told you how to buy tax sale properties free & clear for only a few hundred dollars. Of course it sounded too good to be true like all financial infomercials. So I did some googling, with the assumption that whatever info he’s selling is almost surely available for free somewhere, and I couldn’t find anything remotely similar to the claims he was making. The IRS’s auction site lists few properties (not the 1.8 million or however many he claims) with fixed auction dates and minimum bids in the 100’s of thousands of dollars. I realize these are probably just federal seizures and local and state governments have their own auctions, but could they really be that different?

Anyone have any experience with this? I know people make money doing it but John Beck’s claims sound grossly exaggerated.

2

Tax sales can be ways to get property cheap – I was personally involved in helping an “angel” obtain a former bar in an upstate New York village via tax sale in order to donate it to a youth ministry as a teen center. (He wanted to help them, and doing it that way gave him a hefty capital gains write-off.)

The procedure varies from state to state, but the following is probably a fair statement of how the thing works:

  1. Property owner is presented a tax levy bill for payment.

  2. If he doesn’t pay, he’s then billed for delinquent taxes, with penalty assessed.

  3. If he still doesn’t pay, after N years, the local government takes title to the property as forfeited by failure to pay taxes on it.

  4. Local government puts the property up at auction to recover taxes owed. Highest bid wins; minimum bid is taxes and penalties due and payable, usually with interest. But this can be a small percentage of property’s actual value. Anything paid over what is due the local government will go to the ex-property owner, but that’s quite rare. Winning bidder must put up a percentage of the bid then and there as a binder.

  5. Property owner usually has a certain period after tax sale to redeem the property by paying back taxes in full, but ordinarily is unable to do so.

  6. Title is signed over to winning bidder as the new property owner after that period (and on receipt of full amount of winning bid).

Typical scenario: If Dan Delinquent has a property formerly valued (and tax levy at) at $150,000, which he’s allowed to deteriorate until its fair market value is $110,000, owing to lack of money, and is unable to pay $1,500 in taxes on it for three years, it goes up for tax sale, minimum acceptable bid $4,500 (three years’ taxes – ignoring penalties and interest for simplicity). If you bid $4,800 on it and are the winner, you have to put up $960 (20%) as a bond. He then has 90 days to pay off the $4,500 – if he doesn’t, you need to come up with the additional $3,840, and you have a property worth $110,000 with potential $150,000 value for less than $5,000. Invest $20,000 in rehabbing it, and you have a $150,000 property that cost you, in full, $24,800.

All the city/county wants out of it is the taxes they’re owed, with penalties and interest.

Often, however, what is up for tax sale is marginal undeveloped land on back roads, decrepit warehouses and factories that would cost more to rehab or demolish than the property is worth, etc. If it’s a worthwhile investment for you anyway, go ahead – but watch out for the possible pitfalls.

I suspect most of the outfits advertising these schemes are less than fully honest – but I don’t know that for a fact. (But if you could get a piece of property cheap and resell it dear, why would you spend money to advertise this sort of deal and take penny-ante finders fees from people who answer your ads, instead of buying it yourself and making the money off it?)

3

I just looked this up for a guy at work. It’s not a definitive answer, but it’ll give you some idea of how it works in one state:

SOM - 404 - Page Not Found (results of previus auctions)

http://tax-sale.info/auction_info2.php (online bidding procedures)

Find property by county here: http://tax-sale.info/

4

It’s probably just like buying items on Ebay…
90% of the properties go for close to market rate, 9.9% are good deals and 0.1% are the kind of deals where a businessman can get a decent ROI on his investment after all expenses.
The important part is having the money and time to exploit that 0.1%.
Even if you can turn a profit on this kind of thing, after you subtract the time you spend getting outbid on properties and figuring out what to bid on as well as the opportunity cost of the purchase and/or rehab monies, you’re likely to wind up with a job that doesn’t pay much more than your average college graduate makes, at least on an hourly basis.
Still, if you’re out of work and have a couple hundred thousand dollars worth of free capital, it might beat drawing unemployment for 6 months until you find a straight gig.
If free money shows up in the real world, the invisible hand acts quickly to “unfree” it.
These courses you see on TV indicate that you WILL be competing with people just like you; always a bad sign.